How you choose to hold title can affect your and your loved ones’ property ownership rights long into the future. So, if you are expecting to buy, acquire, inherit or use a real property, it’s important to make sure you are choosing the best way to hold title in California for the property in question.
While California’s ways of vesting title may appear similar on the surface, they have drastically different implications. In this article, we not only discuss the advantages and disadvantages of tenants in common, joint tenancy, community property, community property with right of survivorship and sole ownership, but we also compare each of these title types with one another to help you make a decision about how to vest title.
When purchasing, inheriting, acquiring or using property, one of the most important decisions you will have to make is how to vest title. As described in more detail in “5 Ways to Hold Title in California,” the primary ways to hold title to property are:
- Sole and separate ownership
- Community property
- Community property with right of survivorship
- Joint tenancy with right of survivorship
- Tenancy in common
To give you an example, if you are married or in a registered domestic partnership and jointly purchase real property with your spouse, you could hold title as community property or community property with right of survivorship, which for married couples, has similar implications as joint tenancy with right of survivorship.
Couples who enter into marriage with their own sets of children may opt to hold title to property as community property so they can dispose of their 50% of the property through their will or trust to their own children. On the other hand, a couple without children may opt to hold title as community property with right of survivorship so that the surviving spouse becomes the sole owner of their spouse’s 50% interest in the property upon their death.
Even though this article goes over the disadvantages and advantages of sole ownership, community property, community property with right of survivorship, joint tenancy and tenancy in common, it is always a good idea to consult with a lawyer prior to titling property to ensure you are selecting the best way to hold title for you.
Holding Title as a Sole Owner
In California, sole ownership means a property solely and separately belongs to the title holder.
For example, if a property has a sole owner, and that owner subsequently gets married, that property would generally remain the sole owner’s separate property unless steps are taken by the owner to transmute separate property to community property or community contributions are made toward improving the property or paying down its mortgage.
Advantages of Sole Ownership
Assuming the subject property is acquired prior to marriage, holding title as a sole owner is the least complicated manner of holding title in California.
If you hold title as a sole owner, you have full control over the property and how it’s disposed of (i.e., you can sell the property, auction off the property, make repairs to the property, rent the property or even transfer the property to another person).
Advantages of sole ownership:
- Sole owners wield total control over the property.
- Sole owners can leave the property to whomever they want.
- Sole owners can remain sole owners, even if they get married in a community property state.
Disadvantages of Sole Ownership
There are not many disadvantages to sole ownership, besides it potentially requiring more of a financial investment from the owner.
With other title types, costs arising from a property generally are shared. Sole owners, on the other hand, generally are responsible for paying all costs related to a property (e.g., taxes, repairs, mortgage) from their own pockets.
Disadvantages of sole ownership:
- Sole owners can expect to pay any costs associated with their property from their own pockets.
Holding Title as Community Property
California is a community property state, which means that any property acquired over the course of a marriage by either spouse is regarded as belonging equally to both spouses, regardless of who purchased the property. In other words, if a property is held as community property, it means that each spouse has a 50% interest in the property.
What is generally not considered community property in a marriage is any property the spouses acquired prior to marriage or as a gift/inheritance prior to or during the marriage. However, steps can be taken by the spouses to transmute the character of separate property into community property if they wish.
The only way spouses can bypass community property rules in a community property state is by entering into a marital agreement, such as a prenuptial or postnuptial agreement in which they waive or limit their community property rights.
Advantages of Community Property
When a property is titled as community property, it can serve as a safeguard for spouses in case they get divorced in the future, as each spouse would be presumed to own 50% of the property.
Titling property as community property can be beneficial to surviving spouses as well, since their deceased spouse would not be able to dispose of more than 50% of the community property. This ensures the surviving spouse would be left with at least half of all marital assets, even if their deceased spouse disposes of their share of the assets to someone else.
When a property is acquired during marriage and is titled as community property, the community property presumption generally will supersede the form of title presumption during the spouses’ lifetimes. In other words, if there is ever a dispute between spouses over the character of a property because the property at issue was acquired during marriage but titled as the sole property of one spouse, the community property presumption generally would reign supreme.
Advantages of community property:
- Spouses and domestic partners generally are entitled to 50% of all assets acquired over the course of their marriage or partnership, respectively.
- Spouses can dispose of their 50% of the marital assets to any estate beneficiary or trust beneficiary of their choosing.
- Community property laws can help surviving and divorced spouses maintain financial stability following the death of a spouse or divorce from a spouse, respectively.
Disadvantages of Community Property
It is generally moot to discuss the disadvantages of holding title as community property, as property acquired by spouses and domestic partners residing in a community property state like California during marriage is presumptively considered community property, subject to the exceptions mentioned above.
Nevertheless, it is possible for the breadwinner in a partnership to dislike community property laws on account of their earning the lion’s share of the income but having to equally divide their assets with their spouse in the event of divorce or death.
Disadvantages of community property:
- Community property laws apply to all spouses and domestic partners in California, unless they have waived their community property rights through a legally valid agreement.
- In the event of a divorce, a spouse or domestic partner who is the primary breadwinner will not be entitled to a proportional share of assets based on their financial contributions; instead, they will only be entitled to 50% of the assets, subject to exceptions.
- A spouse or domestic partner cannot dispose of more than their 50% share of the community property through their will or trust, even if they were the one to acquire it.
Holding Title as Community Property With Right of Survivorship
Spouses can take community property a step further by opting for community property with a right of survivorship, which, upon one spouse’s death, automatically makes the surviving spouse the sole and separate owner of the property in question.
If the property had been titled as just community property, the surviving spouse would be entitled to only 50% of the property and the deceased spouse would have the right to dispose of their 50% interest through their will or trust. A right of survivorship means the surviving spouse would own 100% of the community property once their spouse dies, and could dispose of the entire property through their will or trust.
Advantages of Community Property With Right of Survivorship
Many spouses choose to title property as community property with right of survivorship to ensure the surviving spouse, without having to take further action, will become the sole owner of the property following their spouse’s death.
Advantages of community property with a right of survivorship:
- The surviving spouse becomes the sole owner of property upon their spouse’s death without the property having to pass through probate.
- The surviving spouses can maintain continuity in ownership.
- The surviving spouse may face fewer financial hardships after their spouse dies as a result of owning 100% of the property.
Disadvantages of Community Property With Right of Survivorship
Community property with right of survivorship disadvantages are few and far between. If a property is titled as community property with a right of survivorship, it is likely because both spouses wished for their partner to become the sole owner of the property upon their death.
The only disadvantage to this title type is if a decedent had different final intentions for the property in question (e.g., they willed a property titled as community property with a right of survivorship to someone other than their spouse through their will or trust).
In this instance, even though there is a presumption that title controls, a dispute may play out in the probate court over whether the decedent intended for their spouse to inherit their 50% share of the property or intended for the property to be distributed pursuant to the terms of the will or trust (see our article on the title presumption in the Court of Appeals case Estate of Wall).
Disadvantages of community property with a right of survivorship:
- If a spouse dies having willed a property titled as community property with a right of survivorship to someone other than their spouse, their gift may be deemed invalid.
Holding Title as Joint Tenants
If title to property is held in joint tenancy, it means two or more co-owners have an equal interest in the property. When a co-owner dies, the surviving co-owners automatically are transferred the deceased co-owner’s share of the property. This right of survivorship is implied when title is held in joint tenancy.
For example, if two unmarried partners make equal contributions toward purchasing a condominium and they choose to hold title as joint tenants, the surviving joint tenant will automatically become the sole and separate owner of the condominium after the first joint tenant dies.
Joint tenants can be husbands and wives, but marriage is not a requirement for holding title in joint tenancy.
Advantages of Joint Tenancy
The benefits of joint tenancy are similar to those of community property with a right of survivorship, as both manners of holding title are likely to avoid probate upon the death of a title holder, which can result in the surviving title holder(s) saving money, time and headaches.
Advantages of joint tenancy:
- Any two or more persons may hold a property in joint tenancy; a marriage or domestic partnership is not required.
- Property held in joint tenancy generally avoids the long and expensive probate process when one tenant dies.
- Surviving joint tenants maintain continuity in ownership of property and funds held in joint tenancy upon one joint tenant’s death.
- Any financial obligations arising out of property held in joint tenancy must be equally shared by all the joint tenants.
Disadvantages of Joint Tenancy
While it is common for property to be held in joint tenancy, it is not always the best choice. In fact, selecting this title type comes with significant drawbacks that ultimately could derail your estate plans and lose you or your surviving loved ones a substantial amount of money. Unfortunately, because of how simple this title type is to use (e.g., it can be done without the help of a lawyer), it often is the go-to choice of inexperienced professionals at realty companies, title companies and banks.
One significant disadvantage of joint tenancy is that any subsequent arrangements made by a joint tenant surrounding the property will automatically be voided unless the proper legal steps are taken by the joint tenant to void the original deed. For example, if a decedent had held property in joint tenancy with a sibling and later got married and intended for the property to go to the spouse, the sibling may gain full ownership of the property upon the decedent’s death, even if the decedent had willed their share of the property to their surviving spouse.
Likewise, there is something known as the “unity of title rule” in joint tenancy, which also can foil a person’s estate plans. Since each joint tenant owns an undivided interest in the property, this rule requires each joint tenant to hold identical ownership. If, for any reason, this unity is broken, e.g., by one joint tenant transferring a portion of their interest to one of the other co-owners or to a third party, the joint tenancy is considered null and void, and the property is converted to tenancy in common.
The worst thing about this is that a property could be converted into tenancy in common by a joint tenant without the other tenants ever having been notified of the change. The consequences of an undisclosed tenancy in common can be devastating because, whereas before, with joint tenancy, the surviving tenants would automatically have gained full ownership of the property upon the first joint tenant’s death, now the surviving title holders’ respective shares of the property could be distributed as part of their estate and potentially to unintended beneficiaries or heirs.
In the same vein as the unity of title rule, joint tenants, without obtaining consent from the other joint tenants, could terminate their interest in a property through a recorded deed that conveys their interest in the property to a third party. Not only can this negatively affect the other owners’ estate plans, but the tax consequences of such an action can be severe.
One of the final disadvantages of joint tenancy is that certain institutions, such as trusts and legal entities, are barred from using this title type in California, which can limit one’s estate planning options.
Joint tenancy is one of the oldest and most used ways of holding title; however, there are many contemporary tools in estate planning, such as trusts, that may be better options. The bottom line is that you should consult with a lawyer before opting to hold title in joint tenancy to ensure the benefits of joint tenancy outweigh the drawbacks with your specific set of circumstances.
Disadvantages of joint tenancy:
- Property held in joint tenancy typically cannot be disposed of through subsequent arrangements (e.g., wills and trusts) made by a joint tenant.
- Property held in joint tenancy could be secretly converted to tenancy in common by a tenant who violates the unity of title rule, potentially foiling the other tenants’ estate plans.
- Joint tenants can terminate their ownership interest without first obtaining consent from the other tenants, potentially foiling the other tenants’ estate plans.
- Joint tenants generally fare worse than other types of title holders in tax matters.
- Certain institutions, such as trusts and legal entities, are not permitted to hold property in joint tenancy.
Holding Title as Tenants in Common
Tenancy in common gives each co-owner of a property an undivided, transferable interest in the property that generally is proportional to their contribution toward the property. With tenants in common, there is no right of survivorship, as each tenant is entitled to sell, transfer or will their fractional share of the property to someone else (unless they previously signed an agreement waiving their right to do so).
Advantages of Tenants in Common
An obvious advantage of holding title as tenants in common is that it allows persons without the financial means to purchase an entire property on their own to still own an undivided and transferable share of property. Tenancy in common also generally allows for more tenants to be added over time.
Tenancy in common has benefits from a business perspective as well. For instance, if multiple investors are going in on a new restaurant or bar, tenancy in common would be the ideal way to hold title, as it would be easy for new investors to buy into the property and old investors to sell proportionate interests in their shares.
Finally, with tenancy in common, tenants’ individual interests in the property are protected, as creditors can only pursue the judgment debtor’s interest in the property, not the interests of the other tenants in common.
Advantages of tenancy in common:
- Tenancy in common can be a viable option for people who lack the financial means to purchase an equal interest in a property on their own.
- Tenants in common can do with their fractional share of the property what they wish, including selling it, transferring it or disposing of it through their will or trust.
- Tenants in common each have an equal right to use and enjoy the property.
- Tenancy in common allows more tenants to be added over time.
- Tenancy in common is particularly beneficial in business dealings and for investors.
- Creditors can only pursue a judgment debtor’s interest in a property, not the interests of the other tenants in common.
Disadvantages of Tenants in Common
A significant disadvantage of tenants in common is that any owner can sell their fractional interest in the property to anyone, including someone who is a total stranger to the other tenants in common.
Another drawback to tenancy in common is that property held in this manner rarely bypasses probate, unless it is being disposed of through a trust. This is because every tenant has an undivided fractional interest in the property, which they can transfer to whomever they please.
Disadvantages of tenancy in common:
- There is no right of survivorship in tenancy in common, so tenants in common will not automatically become the owners of the deceased tenant’s portion of the property.
- Tenants in common are entitled to sell, transfer or dispose of the property during life or at death through their will or trust to a person of their choosing, even if the new tenant is a total stranger to the other tenants.
- To secure the rights of tenants in common (e.g., to ensure a stranger doesn’t move in), additional legal contracts with rules may need to be drafted for each tenant to sign.
Comparing Title Types
Now that we have discussed the advantages and disadvantages of tenancy in common, joint tenancy, community property with right of survivorship, community property and sole ownership, let’s compare the various title-vesting options available in California.
Community Property vs. Community Property With Right of Survivorship
Husbands and wives in community property states, such as California, can choose, among other forms of ownership, between community property and community property with right of survivorship when vesting title to property acquired over the course of the marriage (subject to limited exceptions).
When property is titled as community property, a spouse can only dispose of their 50% of the property through their will or trust. However, if property is titled as community property with a right of survivorship, then the surviving spouse will automatically become the sole and separate owner of the property upon their spouse’s death without the property having to pass through probate. In other words, spouses holding title as community property with a right of survivorship generally cannot dispose of their share of the property through their will or trust.
Joint Tenancy vs. Community Property
The difference between joint tenancy and community property are subtle because title holders own equal shares of a property with both options. Community property, however, is a title type that can only be used by spouses and registered domestic partners. If two or more unmarried persons are seeking equal co-ownership of a property, tenancy in common or joint tenancy would be the best way to hold title in California.
Another difference between joint tenancy and community property is that the latter does usually need to pass through probate. Because community property only enables spouses to dispose of their 50% share of a property through their will or trust, the value of the property will need to be determined so the property can be sold and the proceeds divided equally between the surviving spouse and the beneficiaries of the decedent’s estate, or so the surviving spouse can buy out the decedent’s interest in the property and continue residing in it.
With joint tenancy the right of survivorship is implied, so if one joint tenant dies, the other joint tenant or tenants automatically become the owners of the deceased tenant’s interest in the property without the property having to pass through probate.
Joint Tenants vs. Community Property With Right of Survivorship
When comparing community property with right of survivorship vs. joint tenancy in California, it is important to point out that both have the same implications in terms of ownership. With joint tenancy and community property with right of survivorship, the surviving tenant or spouse, respectively, will automatically become the sole and separate owner of the deceased title holder’s share of the property upon their death.
While husbands and wives can be joint tenants, holding title as community property with right of survivorship may come with additional tax benefits. However, if co-owners are not spouses, holding title as joint tenants may be the only option if a right of survivorship is desired.
Sole Ownership vs. Joint Tenancy
Under most circumstances, if an unmarried person has the financial means to be the sole owner of property, that is the best way for them to hold title in California, as sole ownership grants them full discretion to do whatever they want with the property. However, if an owner is concerned about securing the financial stability of their loved ones in the event they die, they might choose to hold title as joint tenants with their loved ones to ensure their loved ones will become the full owners of the property upon their death.
As one might expect, sole ownership requires the owner to fulfill all financial obligations related to the property on their own, whereas joint tenancy equally distributes financial obligations among the tenants. But sole owners do have the advantage of disposing of their property to whomever they please through their will or trust. The legal rights of joint ownership do not allow co-owners to dispose of their share of the property to anyone.
Tenants in Common vs. Community Property
Tenancy in common and community property have very few similarities. Community property laws guarantee spouses an undivided 50% interest in all property acquired over the course of a marriage, while tenants in common only own a fractional interest in a property, which usually is commensurate with the contribution they made toward it.
One commonality between these two ways of holding title is that both community property and property held by tenants in common are generally subject to probate once a title holder dies unless the property has been funded into a trust.
Joint Tenancy vs. Tenants in Common
Our clients often ask, “What is better: joint tenants or tenants in common?” There is no straightforward answer to this question. As previously noted, joint tenancy and tenancy in common have very different implications. Most notably, a right of survivorship is implied with joint tenancy, whereas tenants in common do not have a right of survivorship.
A right of survivorship ensures property held in joint tenancy will pass directly to the other joint tenants upon a title holder’s death. For example, if two people are in a cohabiting relationship and they bought a property together, they may wish to hold title as joint tenants, so if one owner dies, the other owner immediately will become the sole and separate owner of the property.
Conversely, someone who is investing in a business endeavor may not wish to hold title as a joint tenant because they likely are expecting their investment to grow and want to pass the income they earn from it on to their surviving family members, which being a tenant in common would allow them to do. If they were to hold title as a joint tenant, their ownership interest would pass to the other co-owners of the property upon their death.
What are the advantages and disadvantages of these forms of title? Speak with our lawyers for help.
There are a number of advantages and disadvantages to the different forms of holding title in California. If you are deciding between title-vesting options, the ideal course of action is to seek the help of a lawyer because there are many factors — such as your marital status, the type of property in question, your estate planning goals, and tax implications — that should be taken into consideration before you make your decision, and a lawyer will have the expertise to help you navigate this complex decision.
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